PLN to be one of the most volatile EM currencies - Rabobank

The Polish zloty is proving relatively resilient to the prospect that the ongoing conflict between the European Commission and the governing Law & Justice party (PiS) is likely to escalate further, according to Piotr Matys, EM FX Strategist at Rabobank.

Key Quotes

“While recently appointed Prime Minister Mateusz Morawiecki remains defiant saying that “we have the right to reform our courts”, there are concerns that the conservative PiS government intends to increase political interference in the judiciary that may further weaken democratic checks and balances. The EC may finally use “the nuclear option” and recommend to trigger Article 7 that would suspend Poland’s voting rights and may include other sanctions.” 

“The market is not seriously concerned mainly due to the assumption that Hungary will veto sanctions that the EU may intend to impose on Poland. That said, it would be an unprecedented situation for Article 7 being used against an EU member that could damage Poland’s reputation.” 

“At this stage the zloty is also insulated by robust GDP growth of 4.9% y/y in Q3 and expectations that the National Bank of Poland may have to start raising interest rates next year due to demandled pressure on inflation.” 

“Governor Glapinski, however, left us stunned when he completely dismissed the notion that domestic environment is conducive for inflation to surprise on the upside driven by robust wage growth and tightening labour market. If the NBP remains reluctant to hike and the external backdrop deteriorates, foreign investors may suddenly become more concerned about Poland’s ongoing conflict with the European Commission.” 

“It is also worth noting that the EU intends to start working on new policies that would restrict access to EU funds for countries disrespecting the democratic standards, Bloomberg reported recently. This supports our concerns expressed on many previous occasions that the dispute with the EU may result in Poland’s structural funds being significantly reduced in the 2021-2028 budget, which would have negative implications for economic activity.” 

“To summarise, over the long-term horizon the zloty may be one of the most volatile EM currencies if the Law & Justice’s party stays on the road to autocracy as various independent institutions claim is the case.”